Factor investing to harness the power of Value and Momentum

Jonathan Boyd
clock • 3 min read


Today, the strength of the global economy is becoming more broadly based. Investors are no longer reliant on the United States to be a single engine of growth. Valuations and earnings growth expectations in the Eurozone, Japan, UK and Emerging Markets still look attractive relative to the US.

First Trust’s suit of single country and regional multi factor Ucits ETFs offer investors a unique set of smart beta strategies to implement tactical equity market allocations across the global. These include First Trust Eurozone AlphaDEX Ucits ETF, First Trust Emerging Markets AlphaDEX Ucits ETF, First Trust Japan AlphaDEX Ucits ETF and First Trust United Kingdom AlphaDEX Ucits ETF.

With the ETF industry constantly evolving and investors demanding more alpha-pursuing index funds, First Trust’s rules based AlphaDEX® methodology was created to be an alternative step in this evolution. At First Trust, we believe blending Value and Momentum as a multi- factor approach to stock selection helps to smooth long-term performance and control volatility risk.


The AlphaDEX® Stock Scoring System is based on years of First Trust’s own propriety research, combined with foundational academic studies to determine which fundamental evaluation measures have the greatest predictive power.

The AlphaDEX® investing methodology uses these factors to rigorously screen, select and weight the stocks contained in the index, based on merit rather than size – Value and Momentum. It is this approach that has been at the heart of our investment philosophy and stock-picking process since 2007.


The application of the AlphaDEX® methodology has resulted in significant differences between AlphaDEX® Ucits ETFs and other factor based indices.

The first is the complete distinction of the Value and Momentum models. We evaluate companies as either a value or a growth company. This is very different to many other more traditional indices that have come up with factor or multi-factor models, which tend to evaluate all companies in their starting universe in exactly the same manner.

The second is the difference between factor tilting and factor ranking, selecting, and weighting. Many factor indexes still look highly like the benchmark, with a high market cap tilt and are laden with mega cap names. AlphaDEX® approaches stocks in the chosen universe from first principles and on an equal basis, with no size bias.


In seeking alpha through our alternative smart beta approach, AlphaDEX® utilises the best of both passive and active approaches.

In the case of passive, market cap weighted, AlphaDEX® is for those that believe market cap weighted benchmarks can be improved upon with a straight forward, rules based approach.

From the active side, AlphaDEX® benefits include a process grounded in empirical data while removing emotion from the investment decision. With smaller single stock weighting, rebalancing more frequently and using sales growth as a key driver, our indices tend to have lower stock specific risk than traditional market capitalization weighted indices.

With the removal of discretion and human bias from the process when evaluating companies, we believe that we can ultimately increase the potential for excess returns and positive alpha by selecting and weighting stocks based on fundamental merit. From our perspective the methodology is simple, it’s simply systemising into the investment process the tenets of good fundamental investing.


AlphaDEX®” is a registered trademark of First Trust Portfolios L.P. First Trust Portfolios L.P. has obtained a patent for the AlphaDEX® stock selection methodology from the United States Patent and Trademark Office.
This material is not comprehensive and must therefore be read in conjunction with a Fund’s prospectus, which contains material information not contained herein, including the terms of investment and information regarding investment risks and restrictions, fees and expenses and conflicts of interests. Potential investors should pay particular attention to the “Risk Factors” section of the Fund’s prospectus. Contact First Trust or visit www.ftglobalportfolios.com to obtain a prospectus and/or Key Investor Information Document.